Question
ZOOM Effective cost of a Line of Credit The Fulton Company is establishing a line of credit with its bank. The line of credit will
ZOOM
Effective cost of a Line of Credit
The Fulton Company is establishing a line of credit with its bank. The line of credit
will have a nominal interest rate of 4.24% and require compensating balances of
10% on the amount borrowed and a 2% on the size of the line of credit. Fulton
forecasts the following deficits for the next 12 months:
January
100,000
February
40,000
March
10,000
April
0
May
0
June
0
July
75,000
August
0
September
225,000
October
0
November
50,000
December
0
The commitment fee (based on the unused portion of the line of credit) is 0.35%.
Fulton realizes that the deficit estimates are not known with certainty. Thus, the
company will set up the credit line such that it can borrow up to 30% more than it
largest expected deficit. Answer the following questions and show all your work.
1. Based on the terms given by the lender, what should the size of the line of
credit be?
2. What is the effective cost of the line of credit?
3. What is the dollar cost to Fulton for including the 30% buffer?
4. Suppose that the lender will apply $4,000 of idle balances that Fulton has in
other accounts with the bank toward the required compensating balances.
What should the size of the line of credit be if you include the idle
balances? What is the effective rate?
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Bitcoinvest Or Not Answers To Crucial Questions
Authors: Mr Panayotis Vasileios Sofianopoulos
1st Edition
1713251752, 978-1713251750
